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New Recap

For those not following Best Buy (NYSE:BBY), they missed the earnings that institutional analysts hypothesized that it ought to get--and today, the share price is falling in accordance with that belief. Best Buy also named its new CEO on Monday. With all the news, including a buy-out offer from the founder (and its subsequent drama), Best Buy shares have been extremely volatile.

In the earnings press release issued this morning, we find that they have suspended earnings projections, in addition to missing analysts "estimates." While they will not be providing earnings guidance, we are still provided with a general 2013 guidance:

"Fiscal 2013 Financial Guidance
Based on the normal seasonality of the business, the majority of the company's annual earnings occur in the second half of the year. Due to lowered expectations for industry wide sales and the uncertainty associated with several key product launches expected in the second half of fiscal 2013, the company has reduced its annual earnings expectations. In addition, the company has just announced a new CEO who will start in early September. Given these factors, the company does not intend to further provide or update earnings guidance for fiscal 2013. The company will continue to provide forward looking commentary on business trends. The company continues to expect to achieve its domestic market share goals for the fiscal year and expects to generate free cash flow5 in the range of $1.25 billion to $1.5 billion for fiscal 2013…

(5) Best Buy defines free cash flow as total cash (used in) provided by operating activities less additions to property and equipment."

As far as this guidance goes, a free-cash-flow of $1.25 billion is approximately a 21% free-cash-flow yield (at the current share price of $17.11). If achievable, that represents a decent return.

Best Buy's Last Quarter

International sales last quarter were very weak, with same store sales declining 8.2% internationally. Market share in the United States and Canada remained unchanged.

Key Drives of Results - From Conference Call (transcript)

  • Favorable gross profit mix. Offset by: lows gross profit phone sales and lower volumes in note books
  • Mid-single digit unit growth in televisions
  • Gross profit rate declined internationally
  • Domestic business was in line with expectations
  • International market worse off
  • Best Buy does not expect (near term) improvements in the international segment

Cash Drainage

If we take the six-month free-cash-flow statement released with their earnings release, and then remove Q1 results, we can get a better picture of the last quarter. I have done that below:

Q2Q1
4-Aug-125-May-12
Net earnings including non-controlling interests-7152
Adjustments
Depreciation228227
Amortization of definite-lived intangible assets10
Restructuring charges 133
Stock-based compensation 33
Deferred income taxes -98
Other, net13220
Changes in operating assets and liabilities
Receivables-323623
Merchandise inventories-253765
Accounts payable310-1153
Other assets -96
Other liabilities-670-264
Income taxes 27
Total cash provided by operating activities-576379

Best Buy also paid down $311 million in debt (year-over-year) and repurchased $122 million (6.3 million shares) of its common stock last quarter at an average price of $19.28.

Cash was drawn down to $680 million from $2,079 million in the previous quarter because of the negative operating cash flow (as calculated above), the financing cash-out-flows, and their capital expenditure of $175 million.

The next two quarters are where Best Buy traditionally makes the majority of its money. Indeed, management on the conference call seemed to think that it was likely that customers were deferring their purchases in anticipation of the forthcoming product cycle.

For the most part, a conclusion at this point is nearly impossible to make. The poor results out of the international segment is, however, curious because it suggests international markets are doing worse than has been publicized; specifically, the Chinese market.

Because of the coming product cycle, a market reaction of the magnitude seen this morning might be overdone since little was learned between yesterday and today. Yes, they missed estimates. Yes, they did not report stellar numbers. Further, they did not release a strategic document about their future--because, I suppose, they are waiting on the new CEO Hubert Joly. But, because of the shopping season, product cycles, and general economic conditions, it will be very difficult to judge the future of Best Buy until the coming holiday shopping season is through.

The lower share price, and the probable increase in pessimism about the company, might make the board look longingly at the past offer by founder Richard Schulze. Fortunately, the commanding position of the company (despite the same-store sales declines) makes it hard to envision a complete collapse. Which is to say, that the downside appears limited at present valuations.

Source: Best Buy's Last Quarter--Cash Drainage